Down payment of 20% to avoid insurance: not always financially advantageous!

Ronnie Perkins · Posted onDecember 22, 2018

Do you make big financial efforts to raise the necessary 20% down payment ? Do you want to avoid the hassle of having to take out a mortgage with CMHC or Genworth? Yet what is sometimes a sacrifice may prove counterproductive financially. Explanations.

Down payment of 20% = money saving? Not always true

The law requires buyers of housing, via a loan, to take out mortgage insurance through accredited bodies. Like CMHC, Genworth, or Canada Guarante. In the event that a down payment of at least 20% has not been made. The price of this insurance varies between 2.8 and 4% of the mortgage loan. Therefore, it is a big budget. It therefore seems quite logical to want to escape this constraint by making all the necessary efforts to constitute the required down payment.

Such reasoning forgets, however, to take into account other financial parameters. These include the rates offered by lenders for insured and uninsured mortgages, which vary.

An insured mortgage is less risky, so the rate is lower

A mortgage that is insured presents a lower risk compared to an uninsured loan. And, the down payment is not a factor taken into consideration in this context. The rate differential therefore sometimes makes it possible to cover the price of mortgage insurance. As a result, the loan will be cheaper without a down payment!

However, the situation must be assessed on a case-by-case basis. Not only do the differences in rates vary by region, but the amount borrowed must also be taken into consideration. The real estate market in Quebec has not been overheated in Toronto or Vancouver. Then, it is less risky and subject to a tighter spread (about 0.2%, more than half that in Toronto). Nevertheless, this lower rate makes it possible to finance a large part of the cost of insurance. In the end, the savings are minimal.

More financial latitudes

Even assuming that the difference in rates between insured and non-insured loans does not cover the full cost of insurance, not putting up another down payment presents another benefit. Namely the possibility of benefiting from wider financial latitudes. We have already explained to you that the federal government has tightened the conditions for access to the mortgage by putting in place a stress test. In short, you need to demonstrate that you have the financial capacity to repay monthly installments by taking into account a 2% increase in your interest rate. The prospective buyers who insure their mortgage without advancing the down payment of 20% with a lower rate, the resistance threshold is mechanically lower.

In conclusion: do not bleed to advance the down payment

If you can afford it, putting 20% or more down payment is not a problem. On the other hand, if it risks putting your finances under stress, it is in your best interest not to make the effort. Instead, use your reserves to deleverage yourself and improve your credit rating (by paying off the debts that have the highest interest rates first).